The economics of toasters and colleges

Home applilances

General Electric recently sold off its appliance division to Haier Group.  GE is a household name but you’ve probably never heard of Haier.  The story came and went but I think it holds two important lessons, one for the US economy, in general, and liberal arts colleges, in particular.

GE is a leader in diesel locomotives, jet engines, medical equipment, and energy generation. Sure, they could keep producing toasters, microwave ovens, and a variety of household appliances but there’s an opportunity cost to doing so.  Every dollar invested in the physical and human capital to produce home appliances is not available for locomotives or wind turbines.

So, GE decided that it made sense to sell off the appliance business and plow the returns back into the stuff they are especially good at and that earns higher returns for stockholders and higher wages for workers.

The lesson for the US economy is that this might be the first of many forays by Chinese companies into the market for US branded products.  Haier is a good example: they sell a variety of home appliances for the US market (manufactured both in China and the US) but Americans don’t know the brand. Haier has thus had to focus on niche markets rather than competing head-to-head with American-branded products.  They first tried to acquire an American brand in 2005 when they bid on Maytag but lost out to Whirlpool.

Now, Haier has instant credibility.  Everyone knows the GE brand and Haier can continue its expansion at a more rapid pace than it would have if they needed to develop a reputation under the Haier name.

It’s likely that this will be the way a variety of Chinese-made products will find a stronger spot in the American and world-wide markets.  For example, a Chinese automaker could offer an attractive price to General Motors for the Pontiac or Oldsmobile marques or Ford for the Mercury name.  (In case you didn’t know, all three brands disappeared over the past decade.)  Tata Motors, an Indian company, already took this route by acquiring Land Rover and Jaguar.

The lesson for liberal arts colleges is that we have to ask the same question that GE did: what are we good at and could we do better with the resources we have?  For example, St. John’s has a School of Theology and Seminary that dates to the beginnings of the university.  Could St. John’s offer a better liberal arts education if it moved the resources currently devoted to educating a few students in theology and preparing a small number of men for ordination and put them to use in biology, chemistry, economics, or music?  Could St. Ben’s take the physical and human capital we devote to nursing and education and invest it to make our top-ranked study abroad programs even better?

Notice, I’m not saying that these programs (and others I could list) don’t have value. The question is whether the value of those resources in alternative uses could be even higher.

I hope that liberal arts college boards and administrators are asking these questions.  GE made its first toaster in 1905 but decided that they had to let go of appliances to build a better company.  Liberal arts colleges can’t be afraid to drop the courses and majors on which our colleges began and look to what today’s students need and what we can do better than other institutions.  Otherwise we’ll simply exist to honor the past and slowly sink into irrelevance.